Industrial Product Price Index (IPPI)

Detailed information for October 2006

The Industrial Product Price Index (IPPI) measures price changes for major commodities sold by manufacturers in Canada.

Data release - November 29, 2006

• Questionnaire(s) and reporting guide(s)
• Description
• Data sources and methodology
• Data accuracy
• Documentation

Description

The Industrial Product Price Index (IPPI) measures price changes for major commodities sold by manufacturers in Canada. The prices collected are for goods sold at the factory gate. As a result, the prices covered by the IPPI refer not to what a purchaser pays but to what the producer receives. They exclude all indirect taxes, such as sales taxes and tariffs as this money does not go to the factors of production (i.e. labour, capital, or profit). They also exclude any transportation service performed by a common carrier beyond the factory gate and any distribution services performed by the retail or wholesale trade industries.

In the 1920's the Dominion Bureau of Statistics (now Statistics Canada) began to cover systematically, the change in wholesale prices and in the output of Canadian manufacturing industries. Some of their output had been included in the General Wholesale Index (GWI), but in a very incomplete manner. After the Second World War, the need to create a set of national accounts to track the economy led to the creation of the Industry Selling Price Index (ISPI). The first ISPI series was published on a 1956 base and only a limited number of industries were covered in the beginning. Over the next twenty years, the remaining industries were added to the selling price index series. In the early 1980's, the IPPI replaced the ISPI and now covered commodities as well as the output of the manufacturing industries.

The IPPI series is considered a high-quality or high-value indicator for several reasons, the most important being its relevance, namely what the IPPI measures. The index measures the movement in prices for manufactured goods produced in Canada, destined for domestic or export consumption. This translates to a ready measure of economic performance of the Canadian manufacturing sector. In addition, the IPPI series supports the Canadian System of National Accounts (SNA), where it is used in the calculation of real Gross Domestic Product (GDP) by Industry. Together, they serve as important indicators of the health of the economy.

As well, the IPPI series is of value in analytical studies of price formation and behaviour, it is frequently used in the process of contract escalation, and often serves as a representative input into other price index series. At times, its contribution is significant if not indirect, as in the case of trade issues or disputes. For example, in the case of softwood lumber, certain provinces tie their stumpage fees to the relevant IPPI series.

The level of index detail available has been quite adequate for most users needs. Naturally, there is a trade-off between the level of index detail and the statistical quality or ability to publish, with this in mind the IPPI series has striven to reach a reasonable balance. Elemental price indexes are calculated for 980 Principal Commodity Group Aggregates (PCGA's) as defined in the 1997 Input/Output (I/O) table. The level of detail available to the public is subject to strict controls on the statistical quality of the data, as well as ensuring the confidentiality of respondents.

Subjects

• Industrial product price indexes
• Prices and price indexes

Data sources and methodology

Target population

The target population of the IPPI consists of those manufacturing establishments residing and producing in Canada, as identified through the Annual Survey of Manufactures (ASM).

The geographical universe for the IPPI is all of Canada, while the industry universe corresponds to the North American Industry Classification System (NAICS) and the commodity universe is all industrial goods manufactured in Canada. Finally, the price universe is the producer price, that is the price collected for goods sold at the factory gate and excluding taxes, tariffs, transportation costs, etc.

Instrument design

Commodity specialists mostly collect price data through the form of mail-out questionnaires, which contain technical descriptions or specifications for the selected products, originally supplied by the respondent (e.g. ready-mix concrete, 20 MPa, cold mix without heating charge or additives). In addition to the commodity description, the questionnaire outlines the terms of sale for which the price applies (e.g. Price per cubic metre delivered to local contractor, all taxes extra, f.o.b. local area, Can$).

Sampling

This is a sample survey.

The sampling frame for the IPPI is based on the most recent data available from the ASM. The most common survey unit is the "establishment" which, in Statistics Canada's usage, refers to the smallest unit of an organization that can provide the basic data required for industry statistics, most commonly an individual plant or factory.

Sampling for any directly surveyed elemental index is usually done by a formal probability sampling procedure. Important producers are "must take" respondents. A random selection is taken from the smaller producers. These samples are redrawn on a regular cycle as dictated by changes in the market. A directly surveyed elemental index is usually supported by 12 to 15 price quotes. An index may be derived from as few as 8 quotes or as many as 30 quotes. Each month, about 9,000 price quotes, from about 3,000 producers for goods sold, are used in the calculation of the IPPI.

The entire survey sample is usually reviewed in total once every 5 years. In the interim, re-sampling occurs primarily for commodity groups subject to relatively rapid development in firm structure or product development.

About 700 of the 980 Principal Commodity Group Aggregates (PCGA's) in the manufacturing sector are accommodated by direct survey and these account for about 90% of the value of manufacturing output in 1997. The price movement for the other PCGA's is estimated indirectly from either directly priced PCGA's or through borrowing price movements from other price series.

Data sources

Responding to this survey is mandatory.

Data are collected directly from survey respondents and derived from other Statistics Canada surveys.

The prices of most of the commodities surveyed for the IPPI are collected monthly, usually over a three-week period. In an effort to minimise respondent burden, prices are collected less frequently in those cases where price changes occur normally at other intervals (e.g. quarterly).

The price information collected relates to the month in question. The goal is to obtain the average price for the reference month. In order to do so and still remain timely, the IPPI is derived from prices reported for the 15th of the month or the nearest prior business day for comparable transactions. However, if special circumstances exist where respondents provide more than one price for the month, a weighted monthly average would be derived.

Commodity specialists obtain, from each of the sampled respondents, price observations for each of the products selected. To do this, they discuss with each respondent the different varieties of products that they sell, and the different terms of sale under which they sell them. They then draw up a detailed description of the physical variety sold. The terms of sale that apply may also be specified for each price quotation. In most cases, the specific quotation chosen pertains to the sale of a major product line to a major type of customer. However, if the same manufacturer is being asked for more than one quotation on the same product line, a procedure is followed which gives some chance of secondary lines or secondary markets being included.

During this preliminary contact with respondents, the importance of obtaining prices for actual transactions is stressed. If a company posts regular list prices from which discounts are typically applied, then the prices collected should reflect these discounts, whether they vary continuously with each sale or whether there are standard rates of discount depending on the class of customer, size of order or so on. In the subsequent validation of the regularly supplied price quotations, one of the most important concerns is that the prices quoted are what actually prevail in the market. For this reason the commodity specialists try to ensure that their contact in each manufacturing company is someone who can supply that information.

Once there is agreement on which price information is to be supplied, the price quotations are collected by means of a printed questionnaire. This is sent to each respondent who gives the price in effect on the 15th of each month, or the last previous business day.

In rare cases where, for a particular commodity, there are no prices collected due to either an insignificant level of production in Canada or a lack of respondent co-operation, proxy series are constructed. Proxy series may consist of several other reported series combined together, or use similar representative price indexes from another program or statistical agency (the Canadian Consumer Price Index and the U.S. Bureau of Labour Statistics indexes are the most common sources).

Estimated percentage shares (by weight in the IPPI) of the collection methods used in the construction of the IPPI:

Direct Mail survey (80%)
Telephone Interviews (10%)
Extraction of data from other sources (10%)

View the Questionnaire(s) and reporting guide(s) .

Error detection

In the day-to-day collection and processing of these indexes, emphasis is placed on the examination and evaluation of prices. Commodity specialists watch closely developments in the markets. They review the behaviour of the reported price changes, both to validate them directly and to ensure they are representative of the product price movement as a whole. Outliers and incorrect or suspicious prices are identified during the initial data processing and, if necessary, follow-ups are carried out with the respondents to ensure the appropriate information has been obtained.

Imputation

Imputation is generally carried out for missing data. In any given pricing period, there will be monthly price reports that are missing due to the fact that respondents are late reporting or for some other reason. In this situation, either the last reported price quotation will be carried forward or an estimate will be made based on other information. Most commonly, the last reported price would be carried forward in the short term while the commodity specialist seeks clarification from the respondent. Carrying the previous price quotation forward is acceptable, as a significant number of prices do not change by much in any given month. Still, it is almost certain that some of the missing prices will have changed and for this reason, price indexes remain subject to revision for six months after publication of a given month's data. This is to accommodate late reports, corrections and some price quotations that are supplied quarterly or semi-annually.

On the other hand, some price quotations are missing because it is impossible to supply them. Where the commodity is out of season and no orders normally occur during that period, the last reported price quotation is carried forward until a new price quote is available. This procedure tends to dampen index movements when the commodity is out of season, and causes upward or downward shifts in the commodity index when the item is re-introduced. This is less significant at higher levels of aggregation and over longer periods of time.

Imputation is also done for handling quality change associated with changes and replacements to products. The design of the index requires the same variety of a given product to be priced continually. There should be no difference in the physical variety or in the terms of sale. It is not always possible to continue with an unchanged specification, but if a close substitute can be found, then the replacement is made. The new specification is not compared directly with the base period price of the old specification but an evaluation is made of the change between the quality embodied in the old variety and that in the new. This estimate of quality difference is then used to adjust the price of the replacement product for the introduction period.

In this method, additional information is sought from the respondent. The commodity specialist makes an evaluation of the quality change in conjunction with the respondent. If the change in value is small in relation to the price of the product, a satisfactory estimate may be obtained over the phone. For products undergoing substantial changes or for those that change their specifications frequently, more detailed information is required. Automobiles (because they undergo changes each model year) are one example where detailed information is obtained and closely analyzed.

Estimation

Weights

The composite indexes are weighted averages of the elemental indexes. For the IPPI, commodity and industry weights are taken from the output matrix of the Input-Output table produced by the Input/Output Division of the Canadian System of National Accounts (SNA). These tables are derived from shipment values reported for the Annual Survey of Manufactures (ASM) and edited to conform to the industry classification (i.e. NAICS). However, each December, company/product weights within a commodity index can be changed in order to reflect important changes in production patterns. The entire weighting scheme for the IPPI is generally revised every 5 years. The current time base and weight base is 1997=100.

Indexes

Three sets of price indexes for industrial products are produced. The first set of indexes is grouped by commodities, weighted by their value of production in 1997, and arranged according to the medium-level commodity groupings from the input-output tables.

The second set of indexes covers the total commodity output of individual industries. These reflect the values of the output of the commodities produced in each industry in 1997. The industry indexes are derived from the NAICS, aggregated to the level required for the input-output tables and the measurement of Gross Domestic Product by Industry.

The third set of indexes is grouped by their stage of processing. Commodities are combined according to where they fit into the stages of processing, who purchases them, and why they were purchased. In the stages of processing system, goods are initially divided into those used mainly as inputs (called "intermediate goods") and those that tend to enter directly into final demand (called "finished goods").

The intermediate goods group is further sub-divided into those that are used in basic industries which are called "first-stage intermediate goods", and those that are used in other industries, called "second-stage intermediate goods". Basic industries are defined as those producing wood products, paper-related products, primary metal products, non-metallic mineral products and basic chemical products. This division is done because prices for "first-stage goods" tend to move in a similar way to the prices for their related raw materials while prices for "second stage goods" tend to behave otherwise. The finished goods group is sub-divided into finished food and feed items, capital equipment, and other finished goods. These three groups represent consumer spending on food; business and government spending on investment goods; and other final demand spending on goods.

The input-output and final demand matrices were used to assign commodities to their appropriate class for the stage of processing grouping.

Quality evaluation

The quality of this index is maintained through the expertise of the commodity specialists and the analysts who develop a thorough knowledge of the domain, including ongoing market intelligence and outside contacts for particular industries. Much time and effort is devoted to detecting and following up unusual fluctuations over time in the pricing patterns of commodities. Prior to dissemination, the price indexes are analyzed and historic trends reviewed.

Disclosure control

Statistics Canada is prohibited by law from releasing any information it collects which could identify any person, business, or organization, unless consent has been given by the respondent or as permitted by the Statistics Act. Various confidentiality rules are applied to all data that are released or published to prevent the publication or disclosure of any information deemed confidential. If necessary, data are suppressed to prevent direct or residual disclosure of identifiable data.

Collected data are converted to price indexes and data are released as such, so that it is not possible to identify the suppliers of raw prices.

Revisions and seasonal adjustment

Each release of index numbers is subject to revision for six months, (e.g., when the July index is released, the index for January becomes final). Exceptions to this rule are announced. However, revisions of the IPPI are for the most part, very small (the average revision being plus or minus 0.2%).

The IPPI allows the comparison, in percentage terms, of prices in any given time period to prices in the official base period, which at present is 1997=100. The official time base for the IPPI was changed from 1992=100 starting with the October 2001 reference month.

Data accuracy

The IPPI attempts to express, in a single number, price changes that involve a range of commodities. There is no obvious, let alone absolute, way of perceiving what a composite price movement really is. For the IPPI, the fixed quantities of the commodities are proportional to the sales made by manufacturing establishments in Canada in the basket reference period, that is, 1997. Consequently considerations about the quality of the IPPI relate to these concepts of composite price movements.

The statistical accuracy of this index depends on price and shipment value data. Price data is principally obtained from a sample survey. Shipment value data also mainly rests on other sample surveys, such as the ASM and the input-output tables. Both kinds of input data are subject therefore to their own errors. Users concerned with the accuracy of the underlying input/output tables for 1997 and the ASM are invited to contact the appropriate Statistics Canada Divisions that is Input-Output Division and the Manufacturing, Construction and Energy Division.

The accuracy of the monthly commodity price quotations is maintained through the expertise of the commodity specialists. They develop a thorough industry knowledge, which is supplemented by outside personal contacts for particular industries. Much time and effort is devoted to detecting and following up unusual fluctuations in the monthly pricing patterns of commodities.

In this vein, the IPPI is closer to a typical survey carried out by Statistics Canada than it is to the Consumer Price Index, as the data is almost entirely collected through a survey process. As such, response rates are important to the overall quality of the index, and in this regard the commodity officers strive to ensure that the IPPI is well responded to, with an estimated weighted response rate of 94%.

In addition to sampling errors, producer price indexes are also subject to errors in price collection and editing. This is particularly true when quality change occurs in the sample with regard to the estimation of pure price change. To estimate pure price change over time, the prices to be directly compared through time ought to refer to identical commodities sold by identical establishments under identical conditions of sale. When this is not practical, prices must undergo adjustments for quality differences, which can prove to be a complicated process to implement. Among the thousands of prices that are compared every month to those of the preceding month, some may not fully satisfy these requirements. The total distortion from this source of error is not thought to be as significant at higher levels of IPPI aggregation.

Though the IPPI uses a sample survey methodology to obtain the necessary information, confidence intervals are not currently estimated, due to the longitudinal nature of price index series. Indexes for higher and lower levels of aggregation are considered to be statistically reliable.

Documentation

• Explanation of methods used and additional sources for industrial price indexes
  • Format: Explanation of methods used and additional sources for industrial price indexes - ARCHIVED - PDF, 15.51[ARCHIVED - PDF, 15.51 kb]